The Great Alpha Chase

September 2015

Wealth managers worldwide are having a tough time generating ROI and adequately compensating for the risks borne by their clients. Are their GCC peers any different in chasing the alpha? Finds out Sunil Kumar Singh

If ever there were a time to take pity on global wealth managers, this would be it. Of all the uncertainties facing the global finance industry, among the biggest perhaps is where to invest profitably. The anemic global growth, especially China’s slowdown, pummeling stock markets, battered commodities, bleeding hedge funds, and bearish emerging markets, have spooked not only the high net worth individuals (HNWIs) seeking to invest their wealth but, more worriedly, have almost taken the wind out of the sails of the investment opportunities around the world.

Not long ago, wealth managers and many private bankers tom-tommed a high investment return of their clients’ money. Not anymore!

As Kevin Gardiner, Global Investment Strategist, Rothschild Wealth Management, cautions in his latest report ‘Rothschild Market Perspective, September 2015’, “In trying to preserve their real wealth, investors have to be vigilant on two fronts. Assets can be threatened from above, by falling markets; and, less visibly, from below, by inflation. The former threat is currently the more immediate, with global stock markets down by roughly 10% from their May peak in dollar terms and even the US market sharing the pain. Longer-term, however, it may yet be the latter that represents the more lasting challenge.”

The uncertainty sparked by China’s devaluation and stock market collapse may not be dispelled quickly. It could take months for it to become clear that investors’ worst fears – a second Global Financial Crisis, this one triggered by an emerging markets bust – may not materialise. The volatility is unearthing more long-term opportunities, but in the current mood investors may be too nervous to capitalize on them, he adds.

Learning it Harder Way

Wealth managers across the world are seeing their profit margins squeezed by high competition and mayhem in global markets. As the days of looking at high-yield opportunities with rose-tinted glasses seem to be over, wealth managers are bracing for the tough times ahead.
But are wealth managers in the Middle East and especially in the GCC — the centre of wealth creation especially the younger wealth generators— in the same situation? Certainly not for the majority of wealth managers sitting in the UAE and the Gulf region.

The region’s private banking and wealth management industry has, over the last few years, seen some kind of consolidation, especially among the foreign players, with a few of them having to even exit the region. But that does in no way mean there is a sort of crisis in the industry. On the contrary, wealth managers, either foreign or local, continue to target the wealthy families as well as the young up-and-coming clients in the region.
And the reason is simple — the promise of superior underlying growth. There is, surely, a pressure on revenue baseline but this is all the more getting offset by the fact that the wealth management industry in the region is still in the evolution phase that gives it considerable flexibility to adapt to changing clients’ needs as well as macros.

“The changing clients’ risk and return appetite, has required the industry to be more responsive and dynamic and the businesses that have adapted to this have been in an attractive position,” explains Mufazzal Kajiji, Global Head of Wealth Management & Mortgages, FGB, UAE. Diversification and volatility control is a key proposition to clients, he adds.

Equities Lead Allocations

Despite being hammered by recent global sell-offs, equities however continue to remain the favourite asset class for HNWIs, say wealth managers. The latest Q3 2015 Compass report by Barclays’ Wealth and Investment Management research that focuses on providing investment advice and recommendations to investors across the globe, including the MENA region recommends a strong overweight for cash and short maturity bonds for clients with a moderate risk profile. The report also maintains an ‘overweight’ in developed markets equities, with a strong ‘underweight’ in high yield and emerging markets bonds. Overall, Barclays continues to stress the importance of diversification for investors, both on a geographic, as well as an asset class level.
Vic Malik, Head of Global Investments and Solutions for the MENA, Barclays Wealth and Investment Management says, “Bonds will always play an important part in a diversified portfolio even if, at the moment, they are expensive and appear complacent to the potential for returning inflation. Traditionally, the biggest risk for an investor choosing to lend to governments or companies over a longer time frame, rather than opting for a series of short-term securities, is the threat of unanticipated inflation. Hence, the ‘underweight’ in bonds as an asset class, both in our strategic, as well as our tactical asset allocation recommendation.”

The Rise of Discerning Clients

One of the critical elements determining the sustainability and components of a successful wealth management business in the UAE and the region is wealthy clients’ changing asset allocation preferences, especially from new-generation HNWIs. Clients are getting more demanding and wealth managers are therefore have to be constantly on the lookout for innovative products and services.

“Our customers, with our encouragement are becoming more focused on absolute return funds. The absolute return funds we typically recommend are those that have bond like characteristics of modest returns and limited downside risk. Investors remain concerned that bonds and sukuks, often seen as one of the safest asset classes, are at risk of losses if global inflation were ever to lift off,” maintains Gary Dugan, Chief Investment Officer, NBAD.

Adds a report by Deloitte ‘From private banking to wealth management Challenges and opportunities’, “New client targets are appearing and becoming increasingly important (clients from new markets, especially from emerging countries; the new generation of HNWIs and UHNWIs). To attract these new clients and meet their needs, proximity and local knowledge are required, which means higher operating costs than for ‘historical’ local or regional private banking clients.”

Proximity and local knowledge are also the two reasons why local wealth management forms have been, of late, successful in getting a foothold in the wealth management space, and taking a bite out of foreign competition.

“If you see the recent events after the global financial crisis, there’s been a significant change in the acceptability of local wealth managers as being good custodians of wealth. Global firms even though well-diversified, have now been significantly affected by regulatory changes happening worldwide. Local firms are going to be significant players going forward as they better understand the local environment,” says Kajiji of FGB.

Expat vs Local

When it comes to the investment pattern/asset choice of wealthy expats v/s wealthy citizens in the region, wealth managers see some differences between the two in terms of their respective investment goals, risk appetite, etc. However, this is not something that’s thwarting them from navigating the bumps in the road.

“Wealthy expats tend to have a significantly smaller exposure to the local assets such as real estate, MENA bonds and equities. Expats tend to have multi asset portfolios denominated in the currency of the country or region they are likely to retire to. Wealthy local citizens tend to be focused on real estate, MENA bond markets and trading local equities. If anything has changed we see local investors as more risk averse than they have been in the past and more willing to buy fixed income and sukuks rather than invest in equities,” says Gary of NBAD.

Wealth managers are also responding by coming up with more sophisticated and enhanced capabilities of their relationship managers (RMs). Not only that, client interface, AuM size, branding, digitization, innovation in services, service proposition and product offering are becoming major planks of regional wealth management firms’ business strategy —a critical step is to embed client interface into the overall wealth management approach and going out of the mere ‘advisory’ role.

In a nutshell, wealth managers in the region are coming out of their ‘advisory’ cocoon and are preparing to take the mantle of providing added assistance that their wealthy clients might expect. In a way they are working to bolster their understanding of the broad range of their clients’ needs — and not merely as a vendor selling investment products. It’s time for them to move with the cheese and they’re very much coming to terms with this new trend.

Perhaps, the race for alpha is easier in the region for wealth managers, and is never gonna lose its luster!